Purchasing a Home is the Best Investment You Can Make
We all have to have a place to live and whether you’re paying rent or paying a mortgage payment, your cost of housing is probably the single largest cost item in your budget. There are some very important differences between paying rent and paying a mortgage payment however.
First of all, the cost of rent will increase over time to keep up with the market so it will probably remain the single largest cost item in your budget. When you purchase a home with a fixed rate mortgage, however, your payment is fixed over the life of the loan (other than property taxes and homeowner’s insurance which may go up) so, as your earnings increase over time, your mortgage payment will represent a smaller and smaller percentage of your income.
Furthermore, when you purchase a home, it will be paid off sooner or later – even if it takes you the full 30 years of a typical mortgage to do it. Once it’s paid off, you will have completely eliminated that single largest item in most people’s budget. Just imagine if you no longer had to pay for a place to live.
Finally, rent is not tax deductible whereas the interest portion of mortgage payments is. This means that even if a mortgage payment costs you a little more than rent would the tax savings will probably more than offset the difference.
Many people compare investing in a home with investing in the stock market but there really is no comparison. When you invest in stocks, you have to pay for it all up front. In order to buy $200,000 worth of stock, you have to come up with the entire $200,000. (While it is possible to purchase stocks “on margin”, where you don’t have to pay the full amount up front, if the value of the stock decreases, you’ll get a “margin call” where you have to put up more cash so for practical purposes, you must have the full amount.)
If your $200,000 investment in stock goes up in value by $20,000, you would have earned a 10% return on your cash investment of $200,000 except that you’ll have to pay income tax on your gain. If you’re in a 25% tax bracket, you’ll have to pay $5,000 of your gain in taxes so your after tax gain would be $15,000 or 7.5%.
When purchasing a home, on the other hand, most people make a relatively small down payment and finance the balance. If you purchase a $200,000 home and put 20% down, you’re only investing $40,000 in cash. In this case, if your $200,000 property goes up in value by $20,000 (the same amount that the stock went up), you’ve actually earned a 50% return on your cash investment of $40,000. Better still, as long as you occupy the home as your primary residence for at least 2 years, you don’t have to pay taxes on that gain when you sell the home.
Earning a 50% return on your money by investing in a home compared to earning 7.5% by investing in stock, is quite a difference. Yes, you have to pay interest on the money that you borrow but that interest is tax deductible so the true cost is less than what you pay.
